What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-26 compared with 2023-02-27 · 118 added, 166 removed, 310 unchanged (48% of the section changed)

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the Company’s ability to increase throughput and capacity to adequately match supply with demand;

the level of expenses associated with product replacement and consumer relations expenses related to product quality;

the level of expenses associated with warranty claims, product replacement and consumer relations expenses related to product quality;

the highly competitive markets in which the Company operates;

cyber-attacks, security breaches or other security vulnerabilities;

the impact of upcoming data privacy laws and the EU General Data Protection Regulation and the related actual or potential costs and consequences;

the impact of current and upcoming data privacy laws and the EU General Data Protection Regulation and the related actual or potential costs and consequences;

material adverse impacts from global public health pandemics and geopolitical conflicts;

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MD&A includes the following sections:

Our Business — a general description of our business, a brief overview of our reportable segments’ products, and operational and financial highlights for the twelve months ended December 31, 2022.

Our Business — a general description of our business, a brief overview of our products, and highlights for the twelve months ended December 31, 2023.

Critical Accounting Policies and Estimates — a discussion of accounting policies that require critical judgments and estimates.

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Liquidity and Capital Resources — an analysis of cash flows, contractual obligations, and a discussion of our capital and other cash requirements.

New Accounting Standards Not Yet Adopted — a general description of new accounting standards applicable to our business and a discussion of their expected impact.

The Company is the world’s largest manufacturer of high-performance, low-maintenance wood-alternative decking and residential railing and outdoor living products and accessories, marketed under the brand name Trex ® , with more than 30 years of product experience.

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Also, through December 30, 2022, the Company provided custom-engineered commercial railing and staging systems for the commercial and multi-family market, including sports stadiums and performing arts venues.

During the three years in the period ended December 31, 2022, the Company operated in two reportable segments:

During the two years in the period ended December 31, 2022, the Company operated in two reportable segments:

Trex Residential Products (Trex Residential), the Company’s principal business based on net sales, and Trex Commercial Products (Trex Commercial).

On December 30, 2022, we completed the sale of substantially all of the assets of our wholly-owned subsidiary and reportable segment, Trex Commercial.

Subsequent to the sale of Trex Commercial, the Company operates in one reportable segment, Trex Residential.

Outdoor living remains one of the fastest growing categories within the repair and remodel sector, and the strength of the Trex Residential brand coupled with our expanded manufacturing capacity, our key competitive advantages, help us to effectively unlock potential market share and drive long term growth.

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Construction began in the second quarter of 2022, and in July 2022, we entered into a design-build agreement.

As previously announced, we anticipate spending approximately $400 million on the facility and the budget for the design-build agreement is contained within this amount.

We anticipate spending approximately $450 million on the facility and the budget for the design-build agreement is contained within this amount.

Construction will be funded primarily through our ongoing cash generation or our line of credit.

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Decking and Accessories

Trex Signature ® decking

Trex Transcend ® Lineage ™ decking

Trex Transcend ® decking

Trex Signature ® decking

Trex Select ® decking

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Trex Select Railing

Trex Select T-Rail

Trex Signature ® aluminum railing

Trex Seclusions ® fencing product

Trex Commercial offered modular and architectural railing and staging systems and solutions for the commercial and multifamily market, including sports stadiums and performing arts venues.

Operational Highlights:

Sale of Substantially All of the Assets of Trex Commercial Products, Inc.

On December 30, 2022, we completed the sale of substantially all of the assets of our wholly-owned subsidiary and reportable segment, Trex Commercial, for net proceeds of $7.3 million.

The divestiture of Trex Commercial reflects our decision to focus on driving the most profitable growth strategy for the Company and its shareholders through the execution of our outdoor living strategy.

With the sale complete, we will dedicate our resources to accelerating conversion to composites from wood and further strengthen our leadership position in the outdoor living category.

The divestiture did not represent a strategic shift with a major effect on the Company’s operations and financial results.

As such, the results of operations of Trex Commercial are consolidated in the Company’s results of operations for the year ended December 31, 2022, through the date of sale.

Refer to Note 17, Segment Information, for additional information on the Trex Commercial segment.

Trex Residential New Product .

On May 16, 2022, we announced the expansion of our premium Trex Residential decking line with the introduction of Transcend ® Lineage ™ .

The new Transcend Lineage boards feature an elevated aesthetic with subtle, elegant graining, available in two new color options that expand the Transcend collection with nature-inspired tones and texturing that today’s homeowners are seeking.

Like all Trex Residential decking, Lineage boards are made primarily from recycled and reclaimed content and engineered with a proprietary, high-traffic formulation and ultra-durable integrated shell.

Transcend Lineage decking launched in mid-May and will be sold nationwide through Trex Residential dealers and major home centers.

Production and sale of the new Transcend Lineage boards began in May 2022.

Trex Residential Arkansas Manufacturing Facility .

Construction began on the new Trex Residential manufacturing facility located in Arkansas in the second quarter 2022.

The new campus will sit on approximately 300 acres of land and will address increased demand for Trex Residential outdoor living products.

The development approach for the new campus will be modular and calibrated to demand trends for Trex Residential outdoor living products.

In July 2022, the Company entered into a design-build agreement and, as previously announced, anticipates spending approximately $400 million on the facility.

The budget for the design-build agreement is contained within this amount.

Trex Residential NexTrex ® Grassroots Movement.

In August 2022, Trex Residential launched its NexTrex Grassroots Movement to broaden its recycling initiative to enlist communities and organizations to partner in its robust recycling efforts.

The initiative provides a turnkey framework for municipalities, universities, nonprofits and other qualifying businesses to serve as centralized drop-off locations for recycling polyethylene plastic film while earning funds for their organizations.

Organizations approved for participation in the NexTrex program can earn funding by serving as drop-off locations where community members can recycle their discarded plastic film packaging.

Each grassroots partner is equipped with a baler, which is housed on site for use in bundling and weighing recycled plastic material.

Trex will pick up and transport the material to its manufacturing facilities in Virginia or Nevada, where it will begin its new life as high-performance Trex Residential composite decking.

Trex Residential Earns Top Honors in Builder Brand Use Study.

For the fourth time in the 15-year history of the Builder Brand Use Study, we earned top honors across all of the measured criteria for the Composite/PVC Decking category and outperformed all other brands in the Deck Railing category as well.

The annual Builder Brand Use Study measures the attitudes of builders, developers, and contractors toward the products they recognize, use, and trust.

The results of this year’s study are based on input from more than 850 building professionals who, for the 15th consecutive year, voted Trex #1 for “brand familiarity,” “brand used during the past two years,” and “brand used most” in the Composite/PVC Decking category.

Trex also secured top honors for the same criteria in the Deck Railing category.

Additionally, Trex received the highest score for “Product Quality” among the 27 composite and PVC decking brands included in the study.

Publication of 2021 Environmental, Social and Governance Report .

On June 23, 2022, we published its 2021 Environmental, Social and Governance (ESG) report.

The annual ESG report highlights how we are “Building a Better Tomorrow Together” through a broad spectrum of initiatives to address its most material ESG priorities.

Highlights include:

Investing to reduce environmental impact and advance sustainability;

Prioritizing employee safety and career growth;

Nurturing a diverse, equitable and inclusive workplace;

Conducting business responsibly through strong governance and ethics;

Adding value to the communities where we operate.

Strategic Investments.

During 2022, we made strategic investments to enhance the support of our Trex Residential brand and channel partners, including the debut of our new “We See It Too” marketing campaign.

We also launched Trex Academy, an online multimedia content hub dedicated to helping the Trex Residential Do-It-Yourself customer bring their deck dreams to life by providing how-to content.

Russian Invasion of Ukraine .

The conflict between Russia and Ukraine has not directly affected our business and results of operations.

We have no operations in Russia or Ukraine but continue to monitor the potential economic impact of the conflict on supply chains, commodity and fuel prices, and prices of raw materials.

We cannot predict the impact of the continued conflict on the global economy, our industry or our business.

Highlights and Financial Performance for the Twelve Months Ended December 31, 2022:

Trex Commercial offered modular and architectural railing and staging systems and solutions for the commercial and multifamily market, including sports stadiums and performing arts venues, through the date of divesture on December 30, 2022.

Trex Named 2024 America’s Most Trusted ® Composite Decking Brand according to a nationwide study by Lifestory Research*.

Trex Named Lowe’s Sustainability Vendor Partner of the Year.

Trex was recognized for its commitment to sustainably made, wood alternative decking, using 95% recycled and reclaimed materials.

Trex Named 100 Best ESG Companies for 2023 by Investor’s Business Daily.

Within the Building Construction Products category, Trex was one of three companies to be selected.

Trex Named America’s Most Responsible Companies 2024 by Newsweek magazine and Statista Inc.

reinforcing Trex’s position as a sustainability leader.

Trex Transcend ® Lineage ™ recognized in Good Housekeeping’s 2023 Home Renovation Awards in the Exterior Enhancements category.

Trex and Keep Arkansas Beautiful awarded ‘Recycling Education Program of the Year”.

A joint initiative by Trex and Keep Arkansas Beautiful was awarded the “2023 Recycling Education Program of the Year” by the Arkansas Recycling Coalition for their collaborative efforts in educating students across Arkansas about the importance of responsible recycling through the NexTrex ® Plastic Film Recycling Challenge.

Trex named a 2023 Eco-Leader by Green Builder Media , the highest honor awarded.

Trex is the only decking brand ever to be awarded Eco-Leader status, which signifies companies across the building products arena that are working to quantify ESG concepts in meaningful ways.

Trex Transcend ® Lineage ™ Named “Sustainable Product of the Year” by Green Building Media as a 2023 Sustainable Product of the Year.

Trex Named Most Sustainable Decking Brand by Green Builder Media for 13 th Consecutive Year and the only brand to be recognized as a sustainability leader for all 13 years of the program.

Introduction of Trex Signature ® Decking that offers realistic woodgrain aesthetics that raises the bar for beauty, performance and sustainability and is available in two luxurious hues inspired by stunning natural settings.

Introduction of Enhanced Product Warranty for the applicable warranty period providing that our Trex Residential products, when properly installed, used and maintained, will be free from material defects in workmanship and materials and our decking, cladding, fascia and railing products will not split, splinter, rot or suffer structural damage from termites or fungal decay.

* 2021-2024 DISCLAIMER :

Trex received the highest numerical score in the proprietary Lifestory Research 2021-2024 America’s Most Trusted ® Outdoor Decking studies.

Study results are based on experiences and perceptions of people surveyed.

Experiences may vary.

Financial Performance Highlights for the Twelve Months Ended December 31, 2023:

(000s omitted, except per share data)

Diluted earnings per share

*A reconciliation of Net Income to EBITDA is presented on page 33 of this document under “Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).”

Capital expenditures .

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Repurchase of common shares .

We repurchased 6.5 million shares of our outstanding common stock in 2022 under our Stock Repurchase Program.

We repurchased 264,896 shares of our outstanding common stock in 2023 under our stock repurchase programs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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We prepare our financial statements in conformity with accounting principles generally accepted in the United States.

result, we are required to make estimates, judgments and assumptions that we believe are reasonable based upon the information available.

As a result, we are required to make estimates, judgments, and assumptions that we believe are reasonable based upon the information available.

These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented.

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If there is a breach of such warranties, we have an obligation either to replace the defective product or refund the purchase price.

We maintain a warranty reserve for the settlement of our product warranty claims.

We accrue for the estimated cost of product warranty claims at the time revenue is recognized based on such factors as historical claims experience and future claims experience.

We review and adjust these estimates, if necessary, based on the differences between actual experience and historical estimates.

Additionally, we accrue for warranty costs associated with occasional or unanticipated product quality issues if a loss is probable and can be reasonably estimated.

We continue to receive and settle claims for Trex Residential products manufactured at our Nevada facility prior to 2007 that exhibit surface flaking and maintain a warranty reserve to provide for the settlement of these claims.

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It has been our practice to utilize the actuarial techniques discussed above during the third quarter, after a significant portion of all claims has been received for the fiscal year and variances to annual claims expectations are more meaningful.

The number of incoming claims received in the year ended December 31, 2022 was significantly lower than the number of claims received in the year ended December 31, 2021, and lower than our expectations for 2022.

Average cost per claim experienced in the year ended December 31, 2022 was significantly higher than that experienced in the year ended December 31, 2021, and higher than our expectations for 2022.

The elevated average cost per claim experienced in the year ended December 31, 2022, was primarily the result of the closure of three large claims, which were considered in our estimation of the surface flaking reserve.

Average cost per claim experienced in the year ended December 31, 2023, was lower than that experienced in the year ended December 31, 2022, which was elevated due to the closure of three large claims, and lower than our expectations for 2023.

The number of incoming claims received in the year ended December 31, 2023, was lower than the number of claims received in the year ended December 31, 2022, and lower than our expectations for 2023.

After evaluating the declining trend in incoming claims in its actuarial analysis, we decreased the estimate of the number of future claims to be settled with payment.

As a result of the decrease in estimated future claims, in the three-month period ended September 30, 2023, we recorded a reduction of $3.8 million to our warranty reserve for the future settlement of surface flaking claims.

We believe the reserve at December 31, 2023 is sufficient to cover future surface flaking obligations.

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We estimate that a 10% change in the expected number of remaining claims to be settled with payment or the expected cost to settle claims may result in approximately a $1.0 million change in the surface flaking warranty reserve.

The following table details surface flaking claims activity related to our residential product warranty:

The following table details surface flaking warranty claims activity:

Year Ended December 31,

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We evaluate the recoverability of goodwill at the reporting unit level.

Through December 30, 2022 and during the two years ended December 31, 2021, we determined that the Company had three reporting units:

Through December 30, 2022 and during the year ended December 31, 2021, we determined that the Company had three reporting units:

a residential reporting unit in the Trex Residential reportable segment, and a commercial railing reporting unit and a staging reporting unit in the Trex Commercial reportable segment.

We completed the sale of our wholly-owned subsidiary, Trex Commercial Products, Inc., on December 30, 2022.

Trex Commercial Products, Inc.

had been a reportable segment of the Company.

On December 30, 2022, we completed the sale of substantially all of the assets of our wholly-owned subsidiary and reportable segment, Trex Commercial.

Subsequent to the sale of Trex Commercial, the Company operates in one reportable segment, Trex Residential.

Goodwill is considered impaired when the carrying amount of a reporting unit exceeds its fair value, and an impairment loss is recognized in an amount equal to that excess but limited to the total amount of goodwill allocated to that reporting unit.

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We measure the fair value of a reporting unit based on a combination of the Income Approach (i.e., the Discounted Cash Flow Method) and a Market Approach.

The Discounted Cash Flow Method is a multiple period discounting model in which the fair value of the reporting units are determined by discounting the projected free cash flows using an appropriate discount rate and indicates the fair value of the reporting units based on the present value of the cash flows that the reporting unit is expected to generate in the future.

The Discounted Cash Flow Method is a multiple period discounting model in which the fair value of the reporting units are determined by discounting the projected free

cash flows using an appropriate discount rate and indicates the fair value of the reporting units based on the present value of the cash flows that the reporting unit is expected to generate in the future.

Significant estimates in the Discounted Cash Flow Method include:

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Revenue and estimated profit were recognized over time based on the proportion of actual costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the performance obligation.

Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.

Incurred costs represent work performed, which corresponds with,

and thereby best depicts, the transfer of control to the customer.

Incurred costs included all direct material, labor, subcontract and certain indirect costs.

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Our results of operations are affected by a number of factors, including, but not limited to, the cost to manufacture and distribute products, cost of raw materials, inflation, interest rates, consumer spending and preferences, the impact of any supply chain disruptions, economic conditions, and any adverse effects from global health pandemics and geopolitical conflicts.

Strong sales growth in the first and second quarters of 2022 reflected an increase in Trex Residential net sales driven by pricing actions taken in 2021 and 2022, volume growth that continued to reflect strong secular trends in the outdoor living category, continued execution of our wood-to-composite market strategy share conversion, and channel inventory build to support historically high growth rates.

The channel inventory build was due in part to expected consumer demand consistent with what was seen in 2020 and 2021, but also was a consequence of improved product availability following more than two years of capacity constraints and product allocations.

However, towards the end of June Trex Residential experienced a reduction in demand from its distribution partners, spurred by concerns over a potential easing in consumer demand due to rising interest rates, declining consumer sentiment and expectations of a general slowing in the economy.

As a result, beginning in the third quarter Trex Residential’s channel partners met demand partially through inventory drawdown.

The drawdown negatively impacted third and fourth quarter sales.

In response to this changed environment, Trex Residential immediately took measures to better align its cost structure with current demand by decreasing production levels, right sizing the employee base, and focusing on cost efficiency programs.

Net sales consist of sales and freight, net of returns and discounts.

Net sales consist of sales, net of discounts.

The level of net sales is principally affected by sales volume and the prices paid for Trex products.

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As part of its normal business practice and consistent with industry practices, Trex Residential has historically offered incentive programs to its distributors and dealers to build inventory levels before the start of the prime deck-building season to ensure adequate availability of its product to meet anticipated seasonal consumer demand and to enable production planning.

These incentives include prompt payment discounts and

favorable payment terms.

These incentives include prompt payment discounts and favorable payment terms.

In addition, we offer price discounts or volume rebates on specified products and other incentives based on increases in purchases as part of specific promotional programs.

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Trex Commercial net sales

Total net sales in 2022 decreased $90.9 million, or 7.6%, compared to total net sales in 2021, due to a decrease in Trex Residential and Trex Commercial net sales of $79.7 million and $11.2 million, respectively.

The decrease in Trex Residential net sales was due primarily to an 18.2% reduction in volume, offset by a 13.6% increase in pricing, The decrease in Trex Residential volume was primarily due to a decline in demand beginning in the third quarter of 2022 as our distribution partners serviced demand requirements primarily through inventory drawdowns rather than reorders.

The increase in pricing was due to price increases taken in 2021 and 2022 on certain products to address inflationary pressures across many key raw materials, labor and transportation.

Total net sales in 2023 decreased $11.2 million, or 1.0%, compared to total net sales in 2022, primarily due to the divesture of Trex Commercial, our wholly-owned subsidiary and reportable segment, on December 30, 2022.

The increase in Trex Residential net sales of $35.3 million or 3.3% was primarily due to an increase in sales volume of 2.6%.

Year Ended December 31,

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Gross profit as a percentage of net sales, gross margin, was 41.3% in 2023 compared to 36.5% in 2022.

Gross margin for Trex Residential and Trex Commercial in 2022 were 37.7% and 8.9%, respectively, compared to 39.3% and 22.0%, respectively, in 2021.

Gross margin at Trex Residential was unfavorably impacted primarily by reduced production volume and inflationary pressures, offset by pricing realization increases on certain product lines, right sizing our employee base, and other actions to better align our cost structure with current demand.

Gross margin for Trex Residential in 2023 was 41.3% compared to 37.7% in 2022.

The increase was primarily due to lower production costs resulting from cost saving initiatives and improved plant performance.

The increase was partially offset by lower absorption resulting from reduced production and higher depreciation and utilities.

Our 2022 gross margin was negatively impacted by our channel partners inventory drawdown to rightsize their inventories and additional costs as we restructured our operations for reduced production levels.

Selling, General and Administrative Expenses

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% of total net sales

Selling, general and administrative expenses increased $2.2 million in 2022 compared to 2021 primarily resulting from a $12.6 million increase in branding and marketing expenses.

The increase was offset by a $10.3 million decrease in personnel and personnel related expenses.

Selling, general and administrative expenses increased $34.3 million in 2023 compared to 2022 primarily resulting from a $19.1 million increase in personnel related expenses, a $5.6 million increase in branding and marketing expenses, a $3.1 million write down of fixed assets, and a $2.8 million increase in research and development expenses.

Year Ended December 31,

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The divestiture reflects our decision to focus on driving the most profitable growth strategy for the Company and its shareholders through the execution of our outdoor living strategy.

With the sale complete, we will dedicate our resources to accelerating conversion to composites from wood and further strengthen our leadership position in the outdoor living category.

The sale resulted in a loss on sale of $15.4 million and is reported in the Consolidated Statements of Comprehensive Income.

Goodwill Impairment Loss

Year Ended December 31,

(dollars in thousands)

Goodwill impairment loss

% of total net sales

During the fourth quarter of 2021, our annual goodwill impairment testing resulted in the recognition of an impairment charge to goodwill at our commercial railing reporting unit and our staging reporting unit within the Trex Commercial reportable segment of $42.5 million and $11.8 million, respectively.

For fiscal year 2021, the Company determined that it was necessary to perform the goodwill impairment test for our railing and staging reporting units utilizing the quantitative assessment.

We performed a quantitative assessment primarily due to a reduction in project commitments, which adversely impacted project backlog and forecasted net sales and EBITDA.

The reduction in project commitments was influenced by a continued delay in new projects due to lingering uncertainty created in the commercial railing and staging markets by the COVID-19 virus.

The delay in new projects, coupled with the Company’s successful fulfillment of its pre-pandemic projects, resulted in lower project backlog and reduced forecasted net sales and EBITDA, which became apparent in the fourth quarter of 2021.

Gain on Insurance Proceeds

Year Ended December 31,

(dollars in thousands)

Gain on insurance proceeds

% of total net sales

In March 2021, an electrical fire occurred at one of our manufacturing buildings in our Virginia complex.

No injuries occurred from the event.

The building was temporarily off-line while damage to the building’s electrical systems was addressed.

Our insurance covered repairs, incremental direct costs to serve our customers, and losses in operating income from the loss in net sales.

During 2021, gains on insurance proceeds primarily related to the settlement from our insurance company of $6.8 million related to the fire at the Virginia facility.

Provision for Income Taxes

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Effective tax rate

The effective tax rate for 2022 was 25.2% compared to the effective tax rate for 2021 of 24.2%.

The increase in the effective tax rate was driven primarily by a reduction in excess tax benefits resulting from the vesting of outstanding share-based employee compensation.

The effective tax rate for 2023 of 25.6% was comparable to the effective tax rate for 2022 of 25.2%.

Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) 1 (dollars in thousands)

Reconciliation of net income (GAAP) to EBITDA and EBITDA margin (non-GAAP):

Year Ended December 31, 2022

Net income (loss)

Interest income, net

Income tax expense (benefit)

December 31, 2023

Residential and

Interest expense, net

Income tax expense

Depreciation and amortization

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Depreciation and amortization

Year Ended December 31,

(dollars in thousands)

Trex Residential EBITDA

Trex Commercial EBITDA

Total EBITDA decreased 6.5% to $291 million for 2022 compared to $311 million for 2021.

The decrease was due to a $50.2 million decrease in Trex Residential EBITDA, primarily driven by a decrease in net sales and gross profit.

The decrease was offset in part by an increase in EBITDA at Trex Commercial, which resulted primarily from a fourth quarter 2021 goodwill impairment charge of $54.2 million, offset by a fourth quarter 2022 loss on sale of $15.4 million.

EBITDA represents net income before interest, income taxes, depreciation and amortization.

EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (GAAP).

We have included data with respect to EBITDA because management believes the measures facilitate performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using EBITDA.

Management considers EBITDA to be important supplemental indicators of our core operating performance because the measures eliminate interest, income taxes, and depreciation and amortization charges to net income.

We have included data with respect to EBITDA and EBITDA as a percentage of net sales (EBITDA margin) because management believes the measures facilitate performance comparison between the Company and its competitors, and management evaluates the performance of its reportable segments using EBITDA and EBITDA margin.

Management considers EBITDA and EBITDA margin to be important supplemental indicators of our core operating performance because the measures eliminate interest, income taxes, and depreciation and amortization charges to net income.

In relation to its competitors, EBITDA eliminates differences among companies in capitalization and tax structures, capital investment cycles and ages of related assets, especially when comparing financial results to prior periods.

For these reasons, management believes that EBITDA provide important information regarding the operating performance of the Company and its reportable segments.

For these reasons, management believes that EBITDA and EBITDA margin provide important information regarding the operating performance of the Company and its reportable segments.

Non-GAAP measures are not meant to be considered superior to or a substitute for our GAAP results.

Year Ended December 31,

(dollars in thousands)

Trex Residential EBITDA

Trex Commercial EBITDA

Total EBITDA increased 12.1% to $326.4 million for 2023 compared to $291.0 million for 2022.

The increase was due to a $15.1 million increase in Trex Residential EBITDA, primarily driven by an increase in net sales and gross profit.

In addition, the divesture of Trex Commercial on December 30, 2022 contributed to the increase in Total EBITDA in 2023.

Year Ended December 31, 2022 Compared To Year Ended December 31, 2021

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Operating Activities

Cash provided by operating activities in 2022 were primarily impacted by lower net sales and gross profit at Trex Residential, a loss on sale of Trex Commercial Products, Inc., and an increase in inventories, offset by an decrease in accounts receivable.

Cash provided by operating activities in 2023 was $389.4 million compared to cash provided by operating activities of $216.2 million in 2022.

The $173.2 million increase in cash provided by operating activities was primarily a result of a reduction in inventories, and to a lesser extent, impacted by higher operating profit, and increases in accounts payable and accrued expenses.

Inventory decreased in 2023 compared to 2022.

During 2022 we saw an increase in inventory as a result of a decline in sales which occurred as our distribution partners met demand partially through inventory drawdown.

The decrease in inventory in 2023 reflects a return to more normal purchase patterns from our distribution partners.

Investing Activities

In 2023, cash used in investing activities for capital expenditures was $166.1 million, primarily at our Trex Residential facilities, including $98.0 million related to construction of our Arkansas facility, $23.9 million related to general plant cost reduction initiatives at our Virginia and Nevada facilities, $13.0 million related to our new corporate office development, and $29.0 million for general support, safety, and environmental initiatives.

Cash provided by investing activities in 2022 included $7.3 million in proceeds from the sale of Trex Commercial.

Financing Activities

Net cash used in financing activities in 2022 consisted primarily of $398.4 million in repurchases of our common stock under our Stock Repurchase Program, offset by net borrowings under our revolving credit facility of $222 million.

Net cash used in financing activities in 2023 consisted primarily of principal payments under our revolving credit facility and to a lesser extent repurchases of our outstanding common stock.

Stock Repurchase Program.

On February 16, 2018, the Board of Directors adopted a stock repurchase program of up to 11.6 million shares of the Company’s outstanding common stock (Stock Repurchase Program).

For the year ended December 31, 2022, the Company repurchased 6.5 million shares under the Stock Repurchase Program.

On February 16, 2018, the Trex Board of Directors adopted a stock repurchase program of up to 11.6 million shares of its outstanding common stock (Stock Repurchase Program).

The Company repurchased 10.1 million shares under the Stock Repurchase Program.

On May 4, 2023, the Trex Board of Directors adopted a new stock repurchase program (2023 Stock Repurchase Program) of up to 10.8 million shares of its outstanding common stock, and terminated the existing Stock Repurchase Program.

The 2023 Stock Repurchase Program has no set expiration date and during 2023 the Company repurchased 264,896 shares of its common stock under the 2023 Stock Repurchase Program.

Inventory in Distribution Channels .

We sell our Trex Residential decking and railing products through a tiered distribution system.

We have over 50 distributors worldwide and two national retail merchandisers to

which we sell our products.

We have over 50 distributors worldwide and two national retail merchandisers to which we sell our products.

The distributors in turn sell the products to dealers and retail locations who in turn sell the products to end users.

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The operating results for Trex Residential have historically varied from quarter to quarter.

Seasonal, erratic or prolonged adverse weather conditions in certain geographic regions reduce the level of home improvement and construction activity and can shift demand for its products to a later period.

Seasonal, erratic or prolonged adverse weather conditions may reduce the level of home improvement and construction activity and can shift demand for its products to a later period.

As part of its normal business practice and consistent with industry practice, Trex Residential has historically offered incentive programs to its distributors and dealers to build inventory levels before the start of the prime deck-building season in order to ensure adequate availability of its product to meet anticipated seasonal consumer demand.

The seasonal effects are often offset by the positive effect of the incentive programs.

Indebtedness Prior to May 18, 2022.

Our Fourth Amended and Restated Credit Agreement (Fourth Amended Credit Agreement) provides us with revolving loan capacity in a collective maximum principal amount of $250 million from January 1 through June 30 of each year, and a maximum principal amount of $200 million from July 1 through December 31 of each year throughout the term, which ends November 5, 2024.

On May 26, 2020, the Company entered into a First Amendment to the Original Credit Agreement (the First Amendment) to provide for an additional $100 million line of credit.

As a matter of convenience, the parties incorporated the amendments to the Original Credit Agreement made by the First Amendment into a new Fourth Amended and Restated Credit Agreement (New Credit Agreement).

In the New Credit Agreement, the revolving commitments under the Original Credit Agreement are referred to as Revolving A Commitments and the new $100 million line of credit is referred to as Revolving B Commitments.

In the New Credit Agreement, all of the material terms and conditions related to the original line of credit (Revolving A Commitments) remained unchanged from the Original Credit Agreement.

The Company entered into the First Amendment, as borrower;

Trex Commercial Products, Inc.

(Trex Commercial), as guarantor;

Bank of America, N.A.

(BOA), as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer;

and certain other lenders including Wells Fargo Bank, N.A.

(Wells Fargo), who is also Syndication Agent;

Truist Bank (Truist);

and Regions Bank (Regions) (each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc.

as Sole Lead Arranger and Sole Bookrunner.

The First Amendment further provides that the New Credit Agreement is amended and restated by changing Schedule 2.01 to add applicable Lender percentages related to the Revolving B Commitment for BOA of 47.5%, Well Fargo of 28.0% and Regions of 24.5%.

The Company’s revolving credit facility executed November 5, 2019 was completely replaced by the Company’s revolving credit facility executed May 18, 2022.

Indebtedness On and After May 18, 2022 .

Indebtedness Prior to December 22, 2022 .

On May 18, 2022, the Company, as borrower;

Trex Commercial Products, Inc.

Trex Commercial as guarantor;

Bank of America, N.A.

BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer;

Wells Fargo Bank, National Association (Wells Fargo), as lender and Syndication Agent;

Regions Bank, PNC Bank, National Association, and TD Bank, N.A.

(each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc.

Wells Fargo as lender and Syndication Agent;

Regions Bank, PNC Bank, National Association (PNC), and TD Bank, N.A.

(YD) (each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc.

as Sole Lead Arranger and Sole Bookrunner, entered into a Credit Agreement (Credit Agreement) to amend and restate the Fourth Amended and Restated Credit Agreement dated as of November 5, 2019.

9 unchanged sentences

Repayment of all then outstanding principal, interest, fees and costs is due at the end of the Term.

The Company and BofA Securities, Inc.

as a sustainability coordinator, are entitled to establish specified key performance indicators (KPIs) with respect to certain environmental, social and governance targets of the Company and its subsidiaries.

The Company and BofA Securities, as a sustainability coordinator, are entitled to establish specified key performance indicators (KPIs) with respect to certain environmental, social and governance targets of the Company and its subsidiaries.

The sustainability coordinator and the Company may amend the Credit Agreement for the purpose of incorporating the KPIs and other related provisions unless the Lenders object to such amendment on or prior to the date that is ten business days after the date on which such amendment is posted for review by the Lenders.

4 unchanged sentences

As of December 22, 2022, the Company entered into a First Amendment to the Credit Agreement (First Amendment) by and among the Company, as borrower, the guarantors party thereto;

Bank of America, N.A.

BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer;

TD Bank, N.A.

as lender and Syndication Agent;

Regions Bank, PNC Bank, National Association, and Wells Fargo Bank, National Association (each, a Lender and collectively, the Lenders), arranged by BofA Securities, Inc.

as Sole Lead Arranger and Sole Bookrunner, amending that certain Credit Agreement dated as of May 18, 2022, by and among the Company, as borrower, the guarantors party thereto, BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer and the other lenders identified therein (as so amended, the “Credit Agreement”).

TD as lender and Syndication Agent;

Regions Bank, PNC, and Wells Fargo (each, a Lender and collectively, the Lenders), arranged by BofA Securities, as Sole Lead Arranger and Sole Bookrunner, amending that certain Credit Agreement dated as of May 18, 2022, by and among the Company, as borrower, the guarantors party thereto, BOA, as a Lender, Administrative Agent, Swing Line Lender and L/C Issuer and the other lenders identified therein (as so amended, Credit Agreement).

The First Amendment removes Trex Commercial as a guarantor to any and all indebtedness under the Credit Agreement.

As a part of the First Amendment, the Credit Agreement was amended and restated to provide for an additional Revolving B Loan (as hereinafter defined).

1 unchanged sentence

Previously, under the Credit Agreement, there was no Revolving B Loan.

The First Amendment also provided that TD Bank, N.A.

would serve as Syndication Agent.

The First Amendment also provided that TD would serve as Syndication Agent.

As of December 22, 2022, the Credit Agreement was amended and restated to refer to this loan as the Revolving A Loan.

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Construction began on the new facility in the second quarter 2022, and in July 2022, the Company entered into a design-build agreement.

As previously announced, the Company anticipates spending approximately $400 million on the facility and the budget for the design-build agreement is contained within this amount.

The Company anticipates spending approximately $450 million on the facility and the budget for the design-build agreement is contained within this amount.

Construction for the new facility will be funded primarily through the Company’s ongoing cash generation or its line of credit.

Our capital expenditure guidance for 2024 is $210 million to $230 million.

In addition to our capital expenditure program, our capital allocation priorities include expenditures for internal growth opportunities,

manufacturing cost reductions, upgrading equipment and support systems, and acquisitions which fit our long-term growth strategy as we continue to evaluate opportunities that would be a good strategic fit for Trex, and return of capital to shareholders.

In addition to our capital expenditure program, our capital allocation priorities include expenditures for internal growth opportunities, manufacturing cost reductions, upgrading equipment and support systems, and acquisitions which fit our long-term growth strategy as we continue to evaluate opportunities that would be a good strategic fit for Trex, and return of capital to shareholders.

We believe that cash on hand, cash flows from operations and borrowings expected to be available under our revolving credit facility will provide sufficient funds to enable us to fund planned capital expenditures, make scheduled principal and interest payments, fund the warranty reserve, meet other cash requirements, and maintain compliance with terms of our debt agreements for at least the next 12 months.

1 unchanged sentence

The actual amount and timing of future capital requirements may differ materially from our estimate depending on the demand for Trex products and new market developments and opportunities.

Our ability to meet our cash needs during the next 12 months and thereafter could be adversely affected by various circumstances, including increases in the cost of raw materials and product replacement costs, quality control problems, higher than expected product warranty claims, service disruptions and lower than expected collections of accounts receivable.

claims, service disruptions and lower than expected collections of accounts receivable.

In addition, any failure to negotiate amendments to our existing debt agreements to resolve any future noncompliance with financial covenants could adversely affect our liquidity by reducing access to revolving credit borrowings needed primarily to fund seasonal borrowing needs.

2 unchanged sentences

There can be no assurance as to whether, or as to the terms on which, we would be able to obtain such financing, which would be restricted by covenants contained in our existing debt agreements.

NEW ACCOUNTING STANDARDS NOT YET ADOPTED

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.” The guidance requires disclosure of significant segment expenses which are regularly provided to the chief operating decision maker (CODM), the composition of and amount of other segment items, the CODM’s title and position within the organization, and how the CODM uses the reported measure(s) of segment’s profit or loss to assess the performance of the segment.

In addition, on an interim basis, all segment profit or loss and asset disclosures currently required on an annual basis must be reported, as well as those required by Topic 280.

The guidance allows for multiple measure of a segment’s profit or loss to be reported.

Entities which have a single reportable segment must apply Topic 280 in its entirety.

The guidance is effective for fiscal years beginning after December 15, 2023, and for interim periods beginning after December 15, 2024.

Early adoption is permitted.

Entities are required to apply the amendments of this update retrospectively for all prior periods presented in the financial statements.

The Company does not intend to early adopt the standard and does not expect adoption of this guidance to have a material effect on its consolidated results of operations and financial position.

In December 2023, the FASB issued ASU No.

2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” The guidance requires public entities to disclose additional categories of information related to federal, state, and foreign income taxes and additional details related to reconciling items should they meet a quantitative threshold.

The guidance requires disclosure of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and to disaggregate the information by jurisdiction based on quantitative thresholds.

The guidance is effective for fiscal year beginning after December 15, 2024.

Early adoption is permitted.

The guidance should be applied on a prospective basis, retrospective application is permitted.

The Company does not expect adoption of the guidance to have a material effect on its consolidated results of operations and financial position.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis